FX Interventionski: Russian Ruble Amid Oil Rout

The trouble with being a commodity-dependent country is that putting all your eggs in one basket is bound to have deleterious effects when downturns in the prices these commodities command occur. Unfortunately for Russia, its worst downturns coincide with steep falls in commodity prices. In 1998 when it famously went to the IMF poorhouse, oil prices were around $18 a barrel. $20/bbl oil! It almost makes you wish China didn't grow so much, but being a charitable sort, I am thankful for all those Chinese lifted out of poverty over this time. The Russians were also rather grateful as Vladimir Putin became Russian president shortly thereafter, erasing the memory of the traumatic Boris Yeltsin years.

Fast-forward sixteen years and it is Putin's turn in the hot seat. As if ill-advised military adventurism and sanctions weren't enough to deal with, recent evidence of the global economy slowing down is causing oil prices to decline anew. Sure $88/bbl oil doesn't sound so bad compared to $18/bbl oil for producers, but the trouble is that Russian production costs have risen since way back when since it doesn't exactly have Western levels of efficiency. What's more, expectations for turning a profit selling oil overseas was predicated on a rather higher market price. As of last year, it was...

Russia will probably require an average Brent oil price of
$117.8 a barrel this year to balance its budget, the fifth
straight year it’s needed crude above $100 and compared with
break-even prices of $90.3 for Saudi Arabia and $65 for
Kazakhstan, Deutsche Bank AG said in a May 10 report.

This sets the stage for what's happening to Russia at the moment. In advance of the damage sanctions will cause as well as lower oil prices, the ruble has plummeted. Simultaneously, the central bank has been intervening in a big way to stem the currency's downward spiral. How "big"? Try $6 billion for starters:

The ruble extended its longest losing streak in more than a year as
$6 billion of Russian currency interventions failed to stem the
depreciation amid tumbling oil prices. The ruble weakened 0.6
percent versus the dollar-euro basket to 45.3303 by 6 p.m. in Moscow,
taking its seven-day decline to 2.3 percent, the longest stretch of
losses since the nine days ended Aug. 1, 2013. Oil, which along with
natural gas contributes almost half of Russia’s revenue, fell 2.2
percent to $88.21 per barrel in London, the lowest since December 2010.

Russia’s central bank intervened in the past 10 days to stabilize the currency, central bank Governor Elvira Nabiullina told lawmakers in Moscow today. The action, which comes as President Vladimir Putin
orders a withdrawal of Russian forces from Ukraine’s border, has failed
to halt the ruble’s drop amid a domestic foreign-currency shortage
stemming from sanctions. The cost to swap rubles into dollars widened to
a record, while wagers for interest-rate increases climbed to a
six-year high.

The main driver for the ruble right now is the oil price,” Dmitry Polevoy,
the chief economist for Russia at ING Groep NV, said in an e-mailed
note. Crude’s decline “totally eclipses” the “reassuring news” that
Russia announced it was pulling back forces from Ukraine’s borders, he
said. The ruble slid 0.9 percent to a record 51.3120 versus the euro and lost 0.3 percent to 40.4350 against the dollar.

Russia's $400 billion-something reserves sound impressive until you hear about the rate they're burning cash. I am not entirely surprised that they've pulled back troops from the border with Ukraine with few histrionics. Apparently not even mighty Russia can buck Western hegemony circa 2014. As its currency drops and drops without end in sight, the interim verdict is inevitable -